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Author: | Zhou, Y.M. |
Title: | Synergy, coordination costs, and diversification choices |
Journal: | Strategic Management Journal
2011 : JUN, VOL. 32:6, p. 624-639 |
Index terms: | USA equipment manufacturing industry diversification coordination costs complexity integration |
Freeterms: | modularity firm scope |
Language: | eng |
Abstract: | Following Penrose's insight, this paper argues that in order to realize the synergy, a firm needs to actively manage the interdependencies (hereafter as: intdpds.) btw. different business lines (herein as: bus-lns). In turn, this increases the coordination costs which may increase faster than synergy, setting a limit to related diversification (as: dvrsfn). This is especially salient when the firm's existing bus-lns. already have complex intdpds. among them. These arguments are tested using a dataset of U.S. equipment manufacturers from 1993 to 2003. The results show that a firm is more likely to diversify into a new business when its existing bus-lns. potentially can share more inputs with the new business. Yet, the firm is less likely to diversify into any new business when its existing bus-lns. are complex. Importantly, the firm's likelihood of diversifying into a new business decreases more with the complexity in the firm's existing bus-lns. if they share more inputs with the new business. These results suggest that increasing coordination costs counterbalance the potential synergistic benefits associated with related dvrsfn. |
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